Recovery may not last, Bernanke warns

It's too soon to declare that the nascent economic recovery will last, Federal Reserve chairman Ben Bernanke warned Monday.

"We still have some way to go before we can be assured that the recovery will be self-sustaining," Bernanke said a speech to the Economic Club in Washington, D.C.

The Fed chief repeated his belief that the recovery will continue at least into next year. But he warned that "formidable headwinds" such as a weak job market, cautious consumers and still-tight credit threaten an American economy that grew at an annual rate of 2.8 per cent in the third quarter of 2009.

Those forces "seem likely to keep the pace of expansion moderate," he said. Economists worry that the recovery in the world's largest economy could fizzle in the latter part of 2010 as government stimulus fades.

The U.S. economy is closely watched in Canada because the latter's economy is heavily dependent on a healthy American market for its natural resources, services or manufactured goods exports.

Although Canada entered recession several months after the United States and its key financial services and real estate sectors have both held up comparatively well, both countries are dealing with high unemployment and added government spending calculated to soften the blow and restore consumer and business confidence.

A cautiously optimistic Bernanke said he expects "modest" economic growth next year. That should help push down the U.S. unemployment rate - now at 10 per cent - "but at a pace slower than we would like," he said.

Under one Fed forecast released last month, the jobless rate would remain stubbornly high next year - ranging from 9.3 to 9.7 per cent. The Fed has warned that it could take five or six years for the job market to return to normal.

To nurture the recovery, the Fed has kept rates near zero for a year. The Fed next meets for a policy meeting on Dec. 15 and 16, when the central bank is widely expected to leave rates at those super-low levels.

Keeping rates low is intended to entice people and businesses to boost spending, which would aid the recovery.

That's happened so far this year. U.S. home sales have firmed, helped by the government's tax buyer credit. Car sales were aided by the U.S. government's now-defunct Cash for Clunkers rebates. Data released last week showed businesses spending on new equipment and software, and better economic conditions abroad have boosted U.S. exports.

Canada's central bank will announce its latest rate decision on Tuesday morning. The Bank of Canada is widely expected to hold its key overnight lending rate steady at 0.25 per cent.